How the SECURE Act will Affect Your Retirement Plan Right Now

January 30, 2020 | Article

How the SECURE Act Will Affect Your Retirement Plan Right Now
The Setting Every Community Up for Retirement Enhancement (SECURE) Act, which became law on December 20, 2019, is intended to help people save for retirement. It includes some significant tax planning opportunities in relation to retirement and estate planning, which could require a change in strategy for many.

There’s a lot to consider when it comes to estate planning and tax strategies.

The SECURE Act’s Effect on Retirement Plans and IRAs
Required Distributions
Under prior law, required distributions from retirement plan accounts and IRAs generally had to be made by April 1 of the year after reaching age 70 ½ (an exception applied for certain business owners). Under the SECURE Act, for individuals who reach age 70 ½ after December 31, 2019, the required beginning date for distributions is now April 1 of the year after reaching age 72.

IRA Contributions
In addition, under prior law, a taxpayer could not contribute to a traditional IRA once he or she had reached age 70 ½. This age limitation on traditional IRA contributions has now been repealed, although income requirements must still be met. However, since there is no age limit for making contributions, the change should allow more money to be contributed to a retirement account before a distribution is required, which should allow the account to grow longer tax free.

Eligible Designated Beneficiary
Another significant change relates to distributions of retirement plans and IRAs at the death of the owner. Under the old rules, taxpayers who inherited a retirement plan account or IRA could often minimize their taxes by taking small annual Required Minimum Distributions (RMDs) over a lengthy payout period based on their life expectancy. This is what is meant by the term “Stretch IRA.”

However, the SECURE Act now limits the availability of this lengthy distribution period, unless a beneficiary qualifies as an “eligible designated beneficiary.”

What is an eligible designated beneficiary under the SECURE Act?
Eligible designated beneficiaries (EDB) include:

  • The surviving spouse of the decedent
  • A child of the decedent who has not reached the age of majority
  • An individual who is disabled or chronically ill
  • An individual who is not more than ten years younger than the decedent

    If an eligible designated beneficiary inherits a retirement plan account or IRA, they can take RMDs over their life expectancy, beginning in the year after the account owner’s death.

    This designation is effective for deaths of retirement plan participants and IRA owners after December 31, 2019.

    For beneficiaries who are not an EDB, a retirement-style account inherited due to a death after December 31, 2019, must be distributed in full by the end of the tenth year after the year of the account owner’s death. Beneficiaries subject to this new 10-year rule include, for example, adult children, nephews, nieces and grandchildren

    These changes will also affect trusts that are named as a beneficiary of a retirement plan account or IRA. Under the SECURE Act, the 10-year rule applies to trusts set up for adult beneficiaries and applies to Accumulation Trusts for surviving spouses. If an IRA has a trust as a named beneficiary, it is important to understand how the new RMD rules apply since they can result in a faster distribution to the trust beneficiaries than under prior law.

    Charitable Giving Opportunities under the SECURE Act
    Clients interested in helping a charity and reducing their income taxes may find that a Charitable Remainder Unitrust (CRUT) will accomplish both these goals. A CRUT is a “split interest trust,” which benefits both the donor/trust settlor and a charity. The donor typically funds the trust with a contribution of appreciated property, such as shares of stock.

    Alternatively, the donor may fund the CRUT by naming it as the beneficiary of a retirement plan account or IRA. The donor receives a tax deduction based on the value of the property contributed to the CRUT. The CRUT then distributes to the donor each year a fixed percentage of the value of the trust’s assets, which may provide a means to stretch out the IRA income over a period longer than 10 years. Finally, unless an earlier time period is chosen by the donor (which may be subject to limitations) at the donor’s death, the charity receives the property remaining in the trust.

    Also, Qualified Charitable Distributions (QCDs) have been an excellent way to reduce taxes in recent years and are still available after the passage of the SECURE Act. With a QCD, a taxpayer who has reached age 70 ½ can take a tax-free IRA distribution of up to $100,000 per year if the distribution is donated to a qualified charity. Since the distribution is tax free, the donation is not deducted as an itemized deduction.

    The QCD reduces the negative impact of tax calculations that are based on gross income or taxable income (Net Investment Income Tax, Qualified Business Income Deduction, education credits, etc.). For a married couple, each spouse can take a QCD from his or her own IRAs, so the total can be up to $200,000 per year if both spouses have significant IRA balances. IRA owners who have an RMD requirement but who don’t need the money should consider taking the distribution as a QCD, since it qualifies as an RMD, but would not be subject to taxation.

    Section 529 Plans
    There were also beneficial changes for Section 529 plans. Section 529 plans are tax-advantaged educational savings accounts used to finance educational costs that are administered by the states. Starting in 2019, tax-free distributions from Section 529 plans can be used to pay up to $10,000 of principal and/or interest on a qualified education loan. To qualify for this treatment, the qualified education loan must be a loan made by or for benefit of a designated Section 529 plan beneficiary or a sibling. The lifetime limit per designated beneficiary is $10,000.

    The Impact of the SECURE Act on Your Retirement Planning
    Tax planning has changed significantly with the passage of the SECURE Act and other recent tax legislation. Now is the time to start thinking about your retirement and estate planning.

    A few immediate steps you can take include:

    • Reviewing your IRS beneficiary designations
    • Updating your will
    • Reviewing trust documents to be sure they will produce your intended results
    • Working with your business advisor to ensure you are making informed decisions about your retirement and estate plan in light of new legislative changes

    The SECURE Act may have a significant impact on the way you plan for retirement. The best thing you can do for your retirement and estate planning is to be proactive and ensure you have the information you need to make informed decisions.

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